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Does Capital Regulation Matter for Bank Behavior? Evidence for German savings banks

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Author Info
Frank Heid
Daniel Porath
Stéphanie Stolz

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Abstract

The aim of this paper is to assess how German savings banks adjust capital and risk under capital regulation. We estimate a modified version of the model developed by Shrieves and Dahl (1992). In comparison to former research, we impose fewer restrictions with regard to the impact of regulation on capital and risk adjustments. Besides, we complement our analysis with dynamic panel data techniques and a rolling window approach.

We find evidence that the coordination of capital and risk adjustments depends on the amount of capital the bank holds in excess of the regulatory minimum (the so-called capital buffer). Banks with low capital buffers try to rebuild an appropriate capital buffer by raising capital and simultaneously lowering risk. In contrast, banks with high capital buffers try to maintain their capital buffer by increasing risk when capital increases.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1192.

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Length: 36 pages
Date of creation: Dec 2003
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Handle: RePEc:kie:kieliw:1192

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Related research
Keywords: bank regulation; risk taking; bank capital;

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  7. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, vol. 43(5), pages 1219-33, December. [Downloadable!] (restricted)
  8. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June. [Downloadable!] (restricted)
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    Other versions:
  10. Avery, Robert B. & Berger, Allen N., 1991. "Risk-based capital and deposit insurance reform," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 847-874, September. [Downloadable!] (restricted)
    Other versions:
  11. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Philipp Engler & Terhi Jokipii & Christian Merkl & Pablo Rovira Kaltwasser & Lúcio Vinhas de Souza, 2007. "The effect of capital requirement regulation on the transmission of monetary policy: evidence from Austria," Empirica, Springer, vol. 34(5), pages 411-425, December. [Downloadable!] (restricted)
    Other versions:
  2. Norden, Lars & Weber, Martin, 2005. "Funding Modes of German Banks: Structural Changes and its Implications," CEPR Discussion Papers 5027, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Patrick Van Roy, 2005. "The impact of the 1988 Basel Accord on banks' capital ratios and credit risk-taking: an international study," Finance 0509013, EconWPA. [Downloadable!]
  4. Rasyad A Parinduri & Yohanes E. Riyanto, 2007. "Do Banks Respond to Capital Requirement? Evidence from Indonesia," SCAPE Policy Research Working Paper Series 0712, National University of Singapore, Department of Economics, SCAPE. [Downloadable!]
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